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A/R FINANCE SOLUTION!
ACCOUNTS RECEIVABLE FINANCING FOR CANADIAN BUSINESS
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Financing & Cash flow are the biggest issues facing business today.
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Account receivable finance is actively sought by thousands of Canadian business owners and financial managers. The A/R component, next to cash on hand itself, is the most liquid asset you have on your balance sheet.
What issues are key to understanding the true value of ‘factoring receivables’? It's the most popular area of asset based lending in Canada. There are several, so let’s dig in.
WHAT IS INVOICE FACTORING FROM A FACTORING COMPANY
Before addressing so those issues, it's prudent to make sure we are also singing from the same hymn book about what exactly A/R financing is. Essentially it's a direct competitor to bank financing, which also of course offers business lines of credit secured by receivables.
THE DIFFERENCE BETWEEN FACTORING AND BANK FINANCING
Just as any other third party, banks collateralize your accounts receivables and allow you to borrow against them, commercial finance companies offering 'factoring' solutions create paperwork that allows you to transfer ownership of receivables as you generate sales. The benefit to your firm is instant cash at all times. So whether your firm sells it's accounts on a short term basis, or ' assigns' them to a bank it's the same thing as it relates to borrowing against your receivable base. The process allows companies to generate the working capital they need to fund day to day small business needs.
WHY IS FACTORING POPULAR?
Why then is account receivable finance a common choice for business owners? Simply because it's an ongoing source of funds without many of our Canadian chartered banks' constraints and approval criteria.
HERES A GOOD EXAMPLE OF HOW THE FACTORING PROCESS BENEFITS COMPANIES
One of the best analogies in understanding why a business employs factoring receivables is to analogize it to a retailer that offers credit card payment. Instead of waiting 30 days or more for payment and limiting how much he can sell the credit card firm pays the retailer the same day.
WHAT DOES FACTORING COST?
Pricing of factoring services in Canada is considered more expensive than bank financing but the trade-off is the cash flow that is no longer limited to waiting for large clients or government accounts, etc to pay your firm. Receivables factoring is not financed via an interest rate, but it is a factoring fee typically in the 1-2% range of the receivable - companies with good gross margins can easily absorb that fee and turn their businesses into cash machines.
HERE ARE 7 ISSUES TO CONSIDER IN FUNDING YOUR A/R
So let’s cover off 7 key issues that you must weigh, consider and discuss when selecting the right A/R Finance solution.
First of all owners need to understand that you are still responsible for any bad debt, as you would be in a bank financing scenario. But you should know also that non recourse financing and credit insurance can be implemented to offset the bad debt issue.
Issue # 2- your overall customer base will be a key factor in the pricing and risk attributed to your factoring transaction. 99.99% of the time all North American receivables can be financed. On occasion, the issue of ' concentration ' i.e. having just a couple of major clients might become a discussion issue.
Issue 3 - Your historical ability to collect your A/R and the invoice size are always considered. Typically the best pricing for factoring A/R is for facilities above 250k, but bottom line any size of A/R portfolio can be considered for financing. The number of accounts receivable invoices your firm generates from sales and the overall size of your a/r portfolio helps determine final pricing.
Issue 5 - there are numerous factoring companies firms in Canada. All of them have different focuses on the size of the transaction, types of industries they prefer to finance, and even where they themselves are located as to where your business is located.
Issue 6 - Numerous specialty areas are often the most fertile ground for A/R finance firms - they include transportation, trucking, personnel firms, etc. But the bottom line is that any commercial receivable can in fact be financed
WHAT DOES 7 PARK AVENUE FINANCIAL RECOMMEND AS THE BEST TYPE OF FACTORING
Our final point, issue # 7 is our recommendation to consider CONFIDENTIAL RECEIVABLE FINANCING. Unlike most receivable finance services, you can bill and collect your own A/R without notice to any other client, supplier, etc. It's as close to bank financing as you'll get.
As we have noted, when it comes to bad debt exposure business owners can also choose between non recourse factoring and recourse factoring, which is simply carrying your usual credit risk or transferring it to the finance company when financing accounts receivable.
CONCLUSION
If you're interested in ensuring you have covered off all the issues in considering accounts receivable factoring your business must seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you ensure you've covered off key issues.
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Stan Prokop
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